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Rationing Poor Consumers to Reduce Prices

  • Simona Grassi

    ()

    (Max Weber Fellow, European University Institute)

  • Ching-to Albert Ma

    ()

    (Department of Economics, Boston University)

We study how rationing in the public sector influences prices in the private sector. A private firm uses consumers’ cost information for cream-skimming. Only rationed consumers consider purchasing from the private firm. Rich consumers are more willing to pay for an indivisible good, such as a health treatment, than poor consumers. The public supplier decides on a rationing rule, and then the private firm reacts by setting prices. In equilibrium, the public supplier must ration both rich and poor consumers. Supplying all poor consumers leaves only rich consumers to the private market. The firm reacts by setting high prices because all available consumers have high willingness to pay. Rationing some poor consumers provides an incentive for the firm to reduce prices because some consumers with low willingness to pay are potential customers.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number wp2008-015.

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Length: 14
Date of creation: Sep 2008
Date of revision:
Handle: RePEc:bos:wpaper:wp2008-015
Contact details of provider: Postal: 270 Bay State Road, Boston, MA 02215
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Web page: http://www.bu.edu/econ/

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  1. Ching-to Albert MA & Simona Grassi, 2011. "Public Sector Rationing And Private Sector Selection," Boston University - Department of Economics - Working Papers Series WP2011-021, Boston University - Department of Economics.
  2. Barros, Pedro Luis Pita, 2000. "Waiting Lists and Patient Selection," CEPR Discussion Papers 2519, C.E.P.R. Discussion Papers.
  3. Hoel, Michael, 2007. "What should (public) health insurance cover?," Journal of Health Economics, Elsevier, vol. 26(2), pages 251-262, March.
  4. Hoel, Michael & Saether, Erik Magnus, 2003. "Public health care with waiting time: the role of supplementary private health care," Journal of Health Economics, Elsevier, vol. 22(4), pages 599-616, July.
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